China's information revolution : managing the economic and social transformation (Vol. 2 of 2) : Overview

39975 v2 Information Revolution Managing the Economic and Social Transformation  China’s Information Revolution Managing the Economic and Social Transformation Christine Zhen-Wei Qiang Washington, D.C. © 2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 10 09 08 07 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not neces- sarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202- 522-2422; e-mail: pubrights@worldbank.org. DOI: 10.1596/978-0-8213 Cover design: Quantum Think, Philadelphia, Pennsylvania Library of Congress Cataloging-in-Publication Data Qiang, Christine Zhen-Wei. China’s information revolution: managing the economic and social transformation / by Christine Zhen-Wei Qiang. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-8213-6720-9 ISBN-10: 0-8213-6720-X ISBN-10: 0-8213-6721-8 (electronic) 1. Information technology—China—Management. 2. China—Economic conditions—21st century. 3. China—Social conditions—21st century. 4. Social change—China—21st century. I. Title. HC430.T4Q53 2007 338.4'70040951—dc22 2006103069 Foreword Informatization—defined as the transformation of an economy and society driven by information and communication technology (ICT)—is not an end in itself but a complex process for achieving more critical development goals. This process involves investing significantly in economic and social infrastructure that facilitates the use of ICT by government, industry, civil society, and the general public. The long-term goal of informatization is to build an information society. Since the 1980s ICT has increasingly been used to achieve economic and social goals. A variety of countries—both developed and developing—have made consid- erable progress in promoting informatization and fostering enabling environments for new technology. Over the past decade China has also devoted considerable resources to informa- tization. Indeed, informatization and economic development have been mutually reinforcing. However, informatization efforts require updating to address the chal- lenges and opportunities created by industrialization, urbanization, upgraded consumption, and increased social mobility. Developing a new, more effective informatization strategy will help China achieve its economic and social goals by spurring innovation, supporting more efficient use of economic resources, and increasing productivity and international competitiveness. This publication is the result of 18 months of strategic research by a World Bank team, at the request of China’s State Council Informatization Office and the Adviso- ry Committee for State Informatization. Drawing on a half-dozen background papers by Chinese researchers, the study provides a variety of domestic perspectives and local case studies. By combining these perspectives with international experi- ences on how similar issues may have been addressed by other World Bank client countries, the report provides guidance on the kind of policies and reforms the authorities may wish to consider in pursuing China’s quest for continued informati- zation. Jim Adams Vice President of the East Asia and Pacific Region The World Bank ix Foreword As per request of the State Council Informatization Office and the Advisory Com- mittee of the State Informatization, the World Bank Group, in cooperation with a number of Chinese experts, has successfully conducted research on the development strategy of China’s informatization. The final report, China’s Information Revolution: Managing the Economic and Social Transformation, summarizes the achievements of this research in a condensed form and presents a series of pertinent recommenda- tions. In addition, many observations, findings, and suggestions of the draft report have played an important role in developing China’s informatization strategies, which was conducted in 2005. The Chinese government published the National Informatization Strategy: 2006–2020 in May 2006 and reconfirmed that informatization is an integrated por- tion of China’s national strategies for moving toward modernization. This strategic publication also clearly defines directive principles, strategic objectives, guiding policies, and primary action plans. With the strategy’s implementation, there is no doubt that China’s informatization will enter into a new phase and make even more significant contributions to China’s economic and social development as well as the course of modernization. The World Bank has had a long-term and effective collaboration with the Chinese government and has contributed substantially to assist China in achieving its goal of modernization. I sincerely hope that this cooperation will continue, not only for the benefit of Chinese people but also for the benefit of people in the developing world. I would like to take this opportunity to express our sincere thanks to the World Bank Group for its highly effective assistance, in particular, to Christine Zhen-Wei Qiang and her team for their creative endeavors, professionalism, and dedication. Zhou Hongren, Ph.D. Executive Vice Chairman The Advisory Committee for State Informatization xi Preface A growing number of countries has recognized the high potential of information and communication technologies (ICT) to contribute to national economic and social development. As China’s development has entered a new stage, it also requires an updated “informatization” strategy for its economic and social transformation. China’s new ICT strategy needs to meet the unprecedented opportunities—and challenges—posed by a fast-growing economy with large, diverse, and widely spread population. ICTs could effectively support institutional changes to make govern- ment functions more service-oriented, efficient, and transparent. In doing so, it would make markets and resource allocations far more efficient to sustain growth. ICTs could also help reform manufacturing and energy industries, reducing the cost of capital and increasing the value added of Chinese products, as well as enhancing Chinese enterprises’ productivity, international competitiveness, and capacity for technological innovation in a broad range of products and processes. The challenge is how to ensure that the deployment of ICTs would contribute to reducing disparity and bringing about a more balanced and equitable social and economic develop- ment to all regions of the country. Like many countries, China faces the challenge of adapting its policies to fast- moving technologies and institutional models. In such a context, policies should set an overall vision and direction for the sector, while not being overly prescriptive in order to allow for greater indigenous technological innovation, adoption, and strategic engagement in setting standards at the international stage. China would benefit from achieving a balance between government regulations and free market dynamics, and between matching the supply and demand of commercially successful applications. Given the cross-cutting nature of these technologies, progress in the ICT sector will have a significant impact throughout the economy. It is our hope that this report, prepared by a team of the World Bank Global ICT Department in collabora- tion with many Chinese experts, will contribute to developing a suitable ICT strategy for China, as well as to providing useful insights on how these technologies could best support economic growth, employment creation, and social development. Mohsen Khalil Director, Global ICT Department The World Bank Group xiii Acknowledgments This publication, prepared at the request of China’s State Council Informatization Office (SCITO) and the Advisory Committee for State Informatization (ACSI), provides a comprehensive overview of the country’s information and communica- tion technology (ICT) sector. An earlier draft was submitted to the government in September 2005 as an input to the development of China’s 10th Five-Year Plan. The publication was jointly funded by the World Bank and the Department for International Development of the U.K. government. The publication was written by Christine Zhen-Wei Qiang (Task Manager). In preparing each chapter, she incorporated key written inputs and background papers provided by Professor Gao Xinmin (Vice Chairman, Policy and Planning Commit- tee, ACSI); Ouyang Wu (Director, Policy and Regulation Division, State Council Informatization Office); Yang Yiyong (Deputy Director General, Economic and Social Development Institute, National Development and Reform Commission); Yu Xiaohui (Director, Telecommunications Planning Research Institute, China Academy of Telecommunications Research, Ministry of Information Industry); Zhang Xianghong (Senior Vice President, China Center for Information Industry Development); Zhao Xiao (Director, Macroeconomics Department, Economic Research Center, State Economy and Trade Commission); and Bruno Lanvin, Michael Minges, David Satola, and Randeep Sudan (World Bank). Overall guidance for the publication was provided by David Dollar (Country Director, China); Mohsen Khalil (Director, Global ICT Department); and Bert Hofman (Lead Economist, China). Special thanks go to Qu Weizhi (Chairwoman, ACSI; then Executive Vice Minister, SCITO) for her important guidance and valu- able support. Valuable contributions and comments were provided by Liu He (Vice Minister, Office of the Central Financial and Economic Leading Group); Zhou Hongren (Executive Vice Chairman, ACSI); He Jiacheng (Chairman, Board of Supervisors for Major State-owned Enterprises), Hu Angang (Professor, Tsinghua University); Hou Yongzhi (Senior Researcher, State Council Development Research Center); and Jared Green, Warren Greving, Naomi Halewood, Subramaniam Janakiram, Nikunj Jinsi, Kaoru Kimura, Zaid Safdar, Peter Smith, Jiro Tominaga, Giorgio Valentini, and Bjorn Wellenius (World Bank). The publication team is grateful to SCITO and ACSI for providing excellent fact- finding, research, and general collaboration, during the 18-month period of the xv  Acknowledgments World Bank’s study. In particular, the cooperation received from Xu Yu (Secretary General, ACSI); and Fang Xinxin (Deputy Secretary General, ACSI) is sincerely appreciated. This publication incorporates the many valuable comments on earlier drafts received from participants at a May 2005 workshop held in Suzhou, an inter- nal Bank review meeting in March 2006 in Washington, D.C., and at a high-level workshop in May 2006 in Beijing to discuss preliminary findings. The publication was edited by Paul Holtz. Lansong Zhang, Leona Luo, and Andrea Ruiz-Esparza provided able assistance with administrative and logistical arrangements for the publication team during missions to China as well as follow- up with provincial and central government officials after the missions returned to Beijing and Washington, D.C. xvi Abbreviations ADSL asymmetric digital subscriber line ADULLACT Association of Developers and Users of Open Source Software in Administrations and Local Communities ASEAN Association of South East Asian Nations BPM business process management B2B business to business B2C business to consumer B2G business to government CAD computer-aided design CDMA code division multiple access CERNET China Education and Research Network CIO chief information officer CNNIC China Internet Network Information Center CRM customer resource management DLD domestic long distance DMB digital multimedia broadcast DVB-H digital video broadcast-handheld ERP enterprise resource planning FDI foreign direct investment G2B government to business G2C government to citizen GDP gross domestic product GPT general-purpose technology GSM global system for mobile communications G2G government to government IC integrated circuit ICT information and communication technology ILD international long distance IPR intellectual property right IPTV Internet protocol television ISP Internet service provider IT information technology ITU International Telecommunication Union xvii  Abbreviations LAN local area network MII Ministry of Information Industry MIS management information system MOR Ministry of Railway MRP materials requirements planning NCRE National Computer Rank Examination NDRC National Development and Reform Commission OA office automation OECD Organisation for Economic Co-operation and Development OFCOM Office of Communications PC personal computer PHS personal handy phone system PPP public-private partnership R&D research and development SARFT State Administration of Radio, Film, and Television SCDMA synchronous code division multiple access SCILG State Council Informatization Leading Group SCITO State Council Informatization Office SETC State Economic and Trade Commission SME small and medium-size enterprise SMIC Semiconductor Manufacturing International Corporation SMS short message service TD-SCDMA time division-synchronous code division multiple access 3G third generation UNCITRAL United Nations Commission on International Trade Law VoIP voice over Internet protocol VSAT very small aperture terminals WAPI WLAN Authentication and Privacy Infrastructure W-CDMA wideband-code division multiple access WLAN wireless local area network WTO World Trade Organization Note: All dollar amounts are U.S. dollars unless otherwise indicated. xviii Overview Information and communications technology (ICT) is a general-purpose technology (GPT) that can fundamentally restructure an economy. Unlike incre- mental technical progress, where technological change occurs in small or predictable steps, GPT represents a radical innovation and produces discontinuity in the path of technological development. ICT is an innovation that facilitates and enhances further innovations. It has made product and process innovation much easier— resulting in faster growth in the number of intellectual property rights and patents issued than during any other period in history, as well as a general acceleration of economic processes. In response, the entire economic horizon has changed. Informatization is not just an economic phenomenon but a social transforma- tion as well and has attributes of a public good. ICT offers value by processing, organizing, storing, and transmitting information. The social effect of ICT is com- parable to that of printing: both enable people to gain knowledge at dramatically lower costs. Moreover, information is commodious and ubiquitous, making its dis- tribution costs marginal—while the fixed cost of producing and retaining ownership of information can be very high. This disparity, which can lead to underestimates of the cost of information by the market, may require government involvement to correct market failures. Informatization is the ICT-driven transformation of an economy and society—not an end in itself but a complex process for achieving more critical development goals. ICT helps countries achieve those goals by spurring innovation, using resources more efficiently, and increasing productivity. Since the 1980s a vari- ety of countries—both developed (Finland, Ireland, Republic of Korea, Norway, Singapore, and Sweden) and developing (Brazil, Chile, Estonia, and India)—have made considerable progress in using ICT and promoting informatization. Success requires supportive policies and regulations, local capacity building, and effective technology implementation and partnerships. 1  China’s Information Revolution O ICT has played a prominent role in China’s development strategies since the mid-1990s. China has the world’s largest telecommunications market, and its informa- tion technology (IT) industry has been an engine of economic growth—growing two to three times faster than gross domestic product over the past 10 years. E- government initiatives (such as the Golden Projects) have achieved significant results. In recent years, the private sector has increasingly used ICT for production and service processes, internal management, and online transactions. China’s development has entered a new stage and requires a new informa- tization strategy. Industrialization, urbanization, and foreign direct investment are creating unprecedented opportunities—and challenges—for China’s informati- zation. The economy will continue to shift from capital-intensive industry toward information- and technology-intensive manufacturing and services. The evolving needs of firms, particularly those with foreign links, and of the growing middle class are increasing demands for informatization. At the same time, China faces structural barriers that inhibit further informatization. For example, informatization has occurred while China is undergoing more basic industrial- ization and as it tries to move from a planned socialist economy to a socialist market economy. China’s new informatization strategy should reflect national goals, taking into account the country’s stage of development and the economic and social development challenges posed by a large country and large population. The strat- egy should support: • Institutional changes to make government functions more service-oriented, efficient, and transparent. Doing so would make markets and resource allocations far more efficient. • Growth of the services industry (such as IT services and IT-enabled services), including employment opportunities. • ICT use in reforming manufacturing and energy industries, cutting the cost of capital, and increasing the value added of Chinese products, as well as efforts to increase Chinese enterprises’ productivity, international competitiveness, and capacity for technological innovation in a broad range of products and processes. Informatization Enablers and Building Blocks Four key enablers and building blocks for achieving these priorities are the legal and regulatory framework, telecommunications infrastructure, ICT industry, and levels of IT literacy and ICT skills. Establishing an Enabling Legal and Regulatory Environment Several areas of China’s legal framework require high-level legislation in the short and medium term. Although it may be premature to develop an overarching law on 2 Overview O informatization, legal and regulatory reforms are urgently needed. Areas where legal and regulatory reform can support informatization—telecommunications, network security, Internet content regulation, data protection and privacy, open access to government information, stronger protection for intellectual property rights, efforts to counteract cyber crime—are priorities, as is implementation of the recent E-Signature Law. However, the enabling environment also needs to be improved by amending existing laws. The complex division of regulatory responsibilities fosters uncertainty. The absence of a legal framework stipulating the principles and scope of informatization makes regulations unclear. Coordination and cooperation among regulatory depart- ments are weak, and China’s myriad agencies have different and sometimes overlap- ping responsibilities. As a result many agencies often regulate the same area—yet accountability is lacking, and resulting regulations are inconsistent, making imple- mentation and execution of laws and regulations problematic. The rule of law should be strengthened to ensure that laws and regulations are enforced and enter- prises and government agencies are held accountable. The legal system should mitigate imbalances in rights and obligations. Many laws and regulations are designed to be administratively convenient, which is often considered more important than individual or enterprise rights. Among enacted laws and regulations, there are far more restrictive provisions than other measures, such as for self-regulation and dispute resolution. Legal obligations are given more weight than rights. An emphasis on processes and procedures (such as licensing) has overlooked protection of privacy and individual rights. Inadequate attention is paid to protecting copyrights and personal data. An enabling legal and regulatory system should focus on encouraging innovation and avoid restrictive provisions on research and development (R&D) that hinder technological change and economic development. Enhancing Telecommunications Infrastructure China’s telecommunications infrastructure has made rapid progress over the past decade. Since the 1990s China’s telecommunications market has become more com- petitive. As of the end of 2005, there were more than 740 million fixed and mobile telephones (ITU 2006). Close to 50 million computers were connected to the Inter- net, serving 111 million users—about half of them broadband users (CNNIC 2006). Falling prices for information and communication services and improvements in telecommunications infrastructure provide a solid foundation for further informa- tization. Still, penetration rates in China remain low relative to Brazil, Russia, other Asian economies, and high-income countries. Expanding rural ICT access is critical to equitable social and economic devel- opment, and China needs to explore ways of narrowing gaps in access. China has not yet established a universal service policy, such as a fund to finance infrastructure expansion in underserved and unserved areas. Nor has it started collecting fees from operators to support infrastructure coverage obligations. In 2004 the Ministry of Information Industry initiated a project to make telephone service available to all 3  China’s Information Revolution O villages, requiring the five main telecommunications providers and China Satellite Communications Corporation to share obligations for universal access based on geographic divisions. Subsidies to lower service charges could increase rural pene- tration. Alternatively, competitive bidding among operators for subsidized contracts would help define obligations and deliver services transparently. In any case, the government should adopt an open policy to allow for technology-neutral ways of implementing universal access to ICT. Although expanding the broadband Internet market is a clear strategic direc- tion for developing China’s telecommunications infrastructure, several barriers impede it. Many potential users remain uneducated about the service or lack the capacity or income to use it. In addition, broadband access depends on personal computer ownership. The government should intensify competition among fixed- line providers, cable television companies, and wireless operators to make broad- band costs affordable to more consumers and enterprises. To support convergence, the government needs to address policy and regulatory issues that prevent broadcast, broadband, and telecom providers from accessing one another’s networks. Establishing an independent ICT regulator would be a crucial step to support convergence. Some government reorganization may also be needed where agencies have overlapping responsibilities. Because network mergers involve interconnecting various systems, technologies, and standards, China may need uniform approaches and revised spectrum management policies to support network convergence. Finally, continuous R&D is needed in technologies that enable convergence. To develop needed hardware and supporting applications, China’s gov- ernment, research institutes, operators, equipment manufacturers, and content and service providers need to establish a comprehensive, multistakeholder process to set key convergence goals. Developing and Innovating the ICT Industry China’s ICT industry has grown rapidly since the mid-1980s thanks to govern- ment support for domestic companies and R&D. Both the central and the local governments are promoting the industry by facilitating funding for startups and incubators. In addition, the government has provided incentives for foreign investment—while also requiring foreign firms to transfer technology in return for market access. Given the size and potential of China’s market, many foreign firms have been willing to make this tradeoff. China led the world with $180 billion in ICT exports in 2004, surpassing those of the United States. A major challenge for China’s integrated circuit and computer industries is to move beyond production of low-end products and applications, climb the value chain, and expand to the global market. Although China is a leading exporter, it still has to import chips to meet local needs. About 90 percent of the chips manufactured in China are exported, yet a large share is re-imported after processing. This means that foreign firms add value to chips produced domestically that are ultimately con- sumed domestically—highlighting the low end of the value chain where China’s 4 Overview O integrated circuit industry is positioned. Given the country’s strong technical skills and ability to attract foreign investment and technology, it clearly has the potential to move up this chain. Three notable features of China’s software industry are its product focus, regional dispersion, and lack of pure-play outsourcers. Many software companies with strong capacities and business models, often in regions with extensive high- technology infrastructure, have a product orientation—leaving IT services unde- veloped. The outsourcing industry is highly fragmented and lacks large players dedicated to outsourcing. Recently, however, foreign companies moving their soft- ware development operations to China (although to serve their corporate parents rather than third party customers) have become a key driver in the country’s out- sourcing market. Such centers create new software export markets and make China a major link in the global software value chain. Chinese IT service firms face low domestic demand, extensive piracy, and intense intellectual property rights challenges, giving firms little incentive to invest in product development. Although China aims to develop an IT services industry that works for foreign firms, many Chinese companies lack English lan- guage skills and have no experience in U.S. or other foreign markets. Until China develops the human capital required to expand this industry, the country will remain a low-cost location for coding and maintenance and is unlikely to create a software industry that can rival Indian (among other) giants. Digital media could become a significant industry in China, but its develop- ment is hindered by weak R&D, a shortage of developers, and tough restrictive reg- ulations on digital content. Given the looming introduction of a third-generation net- work and the growing integration of ICT and traditional content industries, digital media has developed a large service market in a short period, jumping to more than $12 billion in 2005. The industry is expected to maintain high growth over the next 5 to 10 years. However, government policies on digital content can be contradictory, promoting the industry’s development while also asserting stringent regulation. This is partly due to the potential negative impact of digital media. Stimulating innovation and supporting R&D are essential for the ICT industry to attract investment, maintain high growth, and become globally competitive. The demand for ICT from domestic and foreign markets creates opportunities and incentives for investing in additional R&D. First, however, China must ease the obstacles to a more effective national innovation system by removing regulatory obstacles to the introduction of new technologies, eliminating entry barriers and allowing more foreign direct investment, and aligning standards development with international practice. China should establish strategic directions around core technologies and improve collaboration between academia and businesses to focus R&D on rele- vant applications. Core technologies, products, and services—particularly those unique to China’s market or where it has strategic advantages—are critical to the country’s industrial development and competitiveness. These include integrated circuits, network security software, telecommunications equipment, and mobile data 5  China’s Information Revolution O applications. China needs to further integrate enterprises, universities, and research institutes to connect skills development and R&D with industrial development, and to strengthen links between production and demand—especially those from the domestic market. Improving ICT Human Resources Three levels of human resources are critical to informatization: a general public able to use ICT applications at work and home; informatization managers who lead ICT development in government and business; and ICT professionals experienced in network design, software development, and R&D. Stakeholders—governments, enterprises, schools, research institutes, and individuals—must work together to build the human resources needed to maximize the economic and social benefits from ICT development. China has a major shortage of the skilled ICT workers needed to implement its informatization strategy and maximize the strategy’s economic impact. The 4 million workers in China’s IT industry in 2003 accounted for less than 1 percent of the country’s labor force. It is essential to quickly develop human resources of pro- fessional caliber at various levels, including ICT professionals with multidisciplinary management skills. A variety of education and training programs—including links between universities and businesses—can help achieve this goal. The brain drain of skilled workers to more developed regions and countries should be mitigated as much as possible. Limited awareness of the significance of informatization for economic development leads to low investment in ICT infra- structure, impeding investment in ICT programs. All these factors drive away edu- cated, technologically savvy residents of underdeveloped areas. Thus it is essential to raise awareness of the importance of informatization and encourage greater public participation. At the same time, ICT diversifies educational opportunities by over- coming shortages of teachers and classrooms in remote areas through distance learn- ing (delivered by radio, television, or online). ICT Applications These enablers, with the support of solid leadership, should aim to transform administrative and business processes into automated, streamlined processes that support the two pillars of ICT applications: e-government and e-business. Advancing E-Government China’s government has played a significant role in stimulating ICT demand and supply. The government is the country’s largest investor in ICT and leads the adoption and use of ICT applications. China began incorporating ICT networks and applica- tions into government processes in the mid-1980s, with government departments 6 Overview O generally adopting internal informatization appropriate to their functional goals. In recent years, the central government has become more ICT-capable through Golden Projects—initiatives designed to make public services more efficient and transpar- ent. E-community applications at the local government level, such as call centers and Web sites, provide citizens with direct access to public services and improve infor- mation flows, strengthening interactions between officials and citizens. Rural areas in particular can benefit from online information services: access to relevant infor- mation can transform economic opportunities and improve livelihoods for rural households. Many investments in large-scale informatization have had mixed results. E-government applications are often huge management information system projects requiring large investments. At the same time, one of the goals of e-government is to reduce the transaction costs of government operations. Thus it would be useful to adopt a clear methodology for prioritizing e-government investments and maxi- mizing returns. For example, Australia uses a demand-and-value assessment method- ology to determine which e-government applications deserve funding. The Chinese government could consider such an approach to ensure that e-government invest- ments yield tangible results. Detailed feasibility studies should be conducted before large projects are undertaken. ICT suppliers in China often build networks, hardware, and software based on existing technologies and products—failing to achieve the aims of govern- ment agencies to re-engineer administrative and business processes, or to meet the needs of end users such as businesses and citizens. Thus any feasibility study should let practicality guide implementation, based on demand from users. Also crucial are monitoring and evaluation frameworks with clear and measurable output and out- come indicators for each project. In addition, third-party supervision can be used to ensure the quality of e-government projects. Mechanisms are needed for integrating and sharing information resources. Gaps in economic development have generated huge differences among Chinese regions in information resource development and use. Sharing and exchanging information resources could be helpful, especially for regions and provinces lagging in e-government development. Ireland’s Local Government Computer Services Board, the United Kingdom’s Local Authority Software Consortium, and the European Union’s e-Government Observatory are emerging models for the Chinese govern- ment to consider. Although an entrenched culture of secrecy impedes the free flow and sharing of information, provisions on open government information (now in draft form) will likely improve information access. Fostering E-Business Competition among foreign and domestic firms will increase the demand for informatization and boost domestic firms’ productivity and efficiency. As China begins fulfilling the terms of its accession to the World Trade Organization by further opening its economy, its firms will need to become more competitive to thrive in 7  China’s Information Revolution O both domestic and foreign markets. Many Chinese firms recognize the benefits that informatization can have for their operations, and ICT investments have grown steadily in recent years—especially among wholesale and retail firms. ICT applica- tions have significantly improved production and management systems in China’s industrial firms, and they play an increasingly important role in the growth of these firms. Among firms that have adopted ICT applications, most report that the effect on their operations has met or exceeded expectations. A few large companies have led the way in incorporating ICT in their purchasing, advertising, and marketing procedures, while common e-business platforms have become popular for small and medium-size enterprises (SMEs). Business-to-business (B2B) e-commerce systems are often among the most sophisticated Internet business models because they require large amounts of data and commodity exchanges, and so require large Web capacity and office automa- tion and management information systems to manage information inflows and outflows. Common B2B platforms for SMEs enable these firms to join and search for potential clients and suppliers in a sort of commercial information exchange. Meanwhile, business-to-consumer e-commerce, about 5 percent of the e-business market, is a key aspect of informatization for Chinese firms that sell products to consumers. The government can encourage e-business through national and local initia- tives. Government provision of online information and services can demonstrate the potential benefits of ICT to businesses, and can help build trust in the efficacy and security in online transactions. As model users, the central and local govern- ments can also set standards for ICT adoption by firms. To foster access to public services and meet requirements for business purposes, firms should be encouraged to adopt systems and software compatible with e-government services—such as public e-procurement. Many SMEs that do not have the means to access ICT applications or expertise can be aided by government-sponsored incubation. Most of China’s 8 million SMEs are still in the early stages of deploying ICT applications. Firms that want to pursue e-commerce but do not have the means to do so can be assisted through government-sponsored e-business platforms. Such initiatives could be coupled with promotional programs and e-commerce trade shows that demonstrate how e-commerce works and the steps needed for online transactions. Promotional pro- grams could also encourage SMEs that do not export to do so through e-commerce. Summing Up Despite significant progress, obstacles remain to accelerating informatization in China. To a large extent, these are systemic problems cutting across the economy and society, tied to China’s ongoing economic and social transformation. Addressing all the critical factors is complex and requires long-term commitment. However, several key issues need to be addressed decisively in the second half of this decade, through 8 Overview O policies entailing institutional reform, to trigger broader changes. They are as follows: • Fostering indigenous innovation for domestic and foreign markets • Promoting strategic engagement in setting standards • Matching the supply and demand of commercially successful applications • Striking a balance between government regulations and free market dynamics. Government decisions about ICT can also be seen as decisions on the course of the economy as a whole. In some ways, the problems affecting China’s ICT policies and strategies are not much different from those that the country will face in other sectors. However, the rapid pace of technology development means that ICT issues are being addressed before other problems. Moreover, the effects of ICT develop- ment will be felt throughout the entire economy. 9 Informatization is the information and communications technology (ICT)-driven transformation of an economy and society. It is not an end in itself but a means to achieve more critical development goals. This process involves investing significantly in economic and social infrastructure that facilitates the use of ICT by government, industry, civil society, and the general public. A country’s informatization strategy can help develop an enabling environment for technological innovation, a central determinant of the ability to compete successfully in the global economy. Since 1997, China has devoted considerable resources to ICT development. China has the world’s largest telecommunications market, and its information technology industry has been an engine of economic growth—growing two to three times faster than GDP over the past 10 years. E-government initiatives have achieved significant results, and the private sector has increasingly used ICT for production and service processes, internal management, and online transactions. The approaching 10-year mark provides an excellent opportunity to update the policy to reflect the evolving needs of China’s economy. These needs include the challenges posed by industrialization, urbanization, upgraded consumption, and social mobility. Developing a more effective ICT strategy will help China to achieve its economic and social goals by spurring innovation, supporting more efficient use of economic resources, encouraging sustainable economic growth and the development of post-industrial service economies, and increasing productivity and international competitiveness. Progress will depend heavily on China’s enabling environment, including its legal and regulatory framework, telecommunications infrastructure, ICT industry, and human resources. Addressing all the critical factors is complex and requires long-term commitment. This book highlights several key issues that need to be addressed decisively in the second half of this decade, through policies entailing institutional reform, to trigger broader changes. These include encouraging indigenous innovation for domestic and foreign markets; promoting strategic engagement in the setting of standards; matching the supply and demand of commercially successful applications; and striking a balance between government regulations and free market dynamics. China’s Information Revolution: Managing the Economic and Social Transformation is the result of 18 months of strategic research by a World Bank team at the request of China’s State Council Informatization Office and the Advisory Committee for State Informatization. Drawing on background papers by Chinese researchers, the study provides a variety of domestic perspectives and local case studies and combines these perspectives with international experiences on how similar issues may have been addressed by other countries. This book will be of interest to national and local policy makers, international organizations, research institutions, and the larger ICT community. ISBN 0-8213-6720-X